Environmental Regulation, Green Innovation, and Firm Competitiveness: A Conditional Innovation Pathway From Selected MENA Manufacturing
Abstract
Environmental regulation is increasingly viewed as a catalyst for innovation and strategic upgrading, yet its effectiveness in emerging economies remains uncertain. This study examines the association between environmental regulation, green innovation, and firm competitiveness in the manufacturing sectors of five selected Middle East and North Africa (MENA) economies between 2010 and 2023. Building on the Porter hypothesis, institutional theory, and the resource‐based view, the analysis develops an integrated conditional innovation framework linking environmental regulation, green innovation, and firm competitiveness under varying levels of institutional quality and firm‐level innovation capability. Using fixed‐effects and dynamic common correlated effects mean group (DCCE–MG) estimators, the results indicate that environmental regulation is positively associated with green innovation, while green innovation is positively associated with firm competitiveness. Mediation analysis suggests that green innovation represents the principal pathway linking environmental regulation and firm performance, while firm‐level innovation capability and institutional quality strengthen this relationship. Quantile estimates further reveal that these associations are more pronounced among innovation‐intensive firms, suggesting heterogeneous and capability‐dependent responses across the firm distribution. Overall, the findings suggest that well‐designed and credibly enforced environmental regulation is associated with stronger innovation and competitiveness outcomes within supportive institutional environments. Given the observational nature of the data, these findings should be interpreted as conditional empirical associations rather than conclusive evidence of causal effects. The study contributes to the literature by extending the Porter mechanism to resource‐dependent and institutionally diverse settings and offers policy‐relevant insights that may inform low‐carbon industrial transformation strategies in selected MENA economies.